building profits part oneA illustration from February cover

Building profits, part one: Start with your marketing plan

Focus on 4 key areas to pick price targets.

Your 2017 corn and soybeans are still fields of dreams this winter. But in a year of tight margins, whether those plans turn to profits could depend on groundwork done right now in choosing targets for sales.

For sure, farmers have lots of ways for penciling prices into marketing plans. But our exclusive Farm Futures research shows the most profitable farms attack the problem on four different fronts to gain a broad perspective about the year ahead. Here’s how they do it — and how we put together price targets for 2017 production.

Results from a recent nationwide Farm Futures survey.

They look at costs — and not just any costs
Ask a group of farmers what it costs to grow corn or soybeans, and you’ll get as many answers as seats in the chairs. Maybe more. But production costs are the most common consideration for farmers choosing price targets.

Some experts recommend segmenting sales — first covering variable costs, like seed, fertilizer and chemicals, and then targeting enough to pay for fixed costs, like land and machinery payments. Others combine the two, perhaps adding in family living expenses.

The most profitable growers in our survey include another element, one that speaks to their mindset. On top of the cost of growing a crop and raising a family, they factor in profit.

After all, isn’t making money the point if you’re in business? Plus, selling may be easier if you have a clear goal for success in mind ahead of time.

They consider return on investment
So how do you set an objective for profit? The leading farmers in our survey follow the path of top companies in other fields. They measure success through return on investment: That’s how much their equity — assets minus debt — earns on the bottom line.

Return on investment — or ROI — shows how much profit your net worth generates. Without that income, increases in what you own come from changes in the value of your assets, like land. That may suffice when land values are rising consistently. But they’ve fallen the last few years as crop prices declined. And, of course, during the 1980s farm crisis, asset values plunged.

ROI varies considerably between even well-managed farms. Debt is a key variable. Farms with higher debt loads must generate greater returns than farms that owe less, and younger farmers on average typically have higher ROI than older producers who own most, if not all, of their land outright. Our top group of producers had debt-to-asset ratios below 40%, the level bankers traditionally consider a red flag.

They analyze supply and demand
Ask analysts how they pick price targets and many will say they follow the fundamentals, or supply and demand. This is the classic way to forecast markets. While most farmers follow monthly reports by USDA, they don’t appear to factor in analysis of this data when choosing price targets. In the long run, that could be a mistake, because we found a good correlation between this type of analysis and profit.

Incorporating supply and demand into your choice of price targets doesn’t require a Ph.D. in ag economics. But reading carefully through these reports — not just the headline numbers — shows how conditions are changing in the U.S. and around the world. This can help you tune in to what’s important, and filter out the noise in the market that’s not.

USDA’s breakdowns include average cash price ranges that can be a starting point, knowing that futures often go higher, and lower, than these averages.

They study price charts for clues
Some analysts look at price charts exclusively to follow the market. But even supply-and-demand fundamentalists often pay attention to so-called technical analysis. Studying price charts and their patterns can point out potential price targets and help with timing of sales.

This work can be very complex, full of arcane ways of reading the tea leaves of the futures market. But just looking at a price chart can tell you how the market is trending — and when rallies may be coming to a halt.

Few of the farmers we surveyed used only price charts when picking targets. That’s probably a good thing, because those who did weren’t significantly more profitable than the rest of the pack.

These four factors sound simple enough. But few of the growers we surveyed took all four into account when picking targets. Clearly, it doesn’t pay to develop goals in a vacuum that fails to consider both where prices may go and what it takes to put the crops in the ground.

And it appears to be working. Those who used this process were more likely than average to have already sold enough of their 2016 production to ensure a profit.

What are your targets?
The growers we surveyed have expectations for modest rallies in 2017-18. Their average futures price target for corn is $4.07, with soybeans at $10.39. December futures moved within 15 cents of the corn target in January, while November soybeans traded above the goal briefly after Thanksgiving.

The top earners in our survey were a little more optimistic, adding about a dime to the corn target and 40 cents for beans. A few of the growers we surveyed are a lot more bullish or bearish than that. But most expectations are tightly clustered, as the scatter gram chart at right shows.

Here’s what we think
The system used by the top farmers in our survey is close to the method we use every winter to pick price targets for the coming year.

For corn, we put the total cost of production plus living expenses at $3.95 for 170-bushel-per-acre corn and $10 for 47.2-bpa soybeans. Average harvest basis for soybeans runs 35 cents on average, with corn around 20 cents. So the average grower we surveyed has expectations in line with costs.

Instead of factoring in profit or return on investment, we consider two other adjustments to account for what could happen if yields aren’t quite as good as expected. Lower yields raise the cost of production, potentially turning a once profitable price into the red.

Covering sales with call options is one way to deal with this uncertainty, though the premiums are an additional cost. The other alternative is to raise the target price to adjust for a yield reduction. This can add 10 to 20 cents for corn and 30 to 40 to cents to soybean objectives, depending on the strategy used. So for corn, the ante is up to $4.30, with soybeans at $10.70.

To analyze 2017 fundamentals, we relied on the Farm Futures survey published in January for this spring’s planting intentions. That showed a huge shift to soybeans, with acreage potentially topping 90 million. But a return to average yields would mean lower production. Ending stocks would be steady around 450 million bushels if demand holds up. The average target selling range under this scenario would be up to $10.65.

Price charts for November futures show potential to $10.85 if November futures can hold $9.75, avoiding a big washout this winter.

To make room for all those soybeans, growers said they hope to cut corn acreage by 4 million this spring. Yields around 170 bpa would slash production to 14.1 billion, potentially trimming ending stocks below 2 billion. Rallies to $4.50 are possible with typical growing-season concerns. That prospect looks fairly daunting on the December futures price chart so far, with $4.25 being a more realistic target. Selling carry in corn and perhaps soybeans to hedge inventory could be a way to add modest on-farm storage returns.

Targets of $4.25 corn and $10.65 soybeans could provide a modest profit if yields don’t suffer too much. But shaving production costs even more could be crucial for those hoping to make aggressive sales. And managing the ups and downs of unexpected expenses — or rallies — could also be key to profits in the year ahead.

Related: Building profits, part two: A 3-step approach to lower costs

Related: Building profits, part three: Creating a flexible, real-time crop budget

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